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In February 2020, the Trump Justice Department settled all outstanding criminal issues with Wells Fargo for a $3 billion civil fine.
Last week, a small but significant story almost got lost amid the larger revelations about several bank collapses. Carrie Tolstedt, the former senior executive at Wells Fargo in charge of that bank’s systematic looting of its customers via fake accounts and spurious extraction of fees, agreed to a plea bargain that could give her a prison sentence of up to 16 months. Sentencing will be delayed until April.
This case is significant because it is an exception to the government’s abject failure over two decades to bring individual corporate criminals to justice. After the 2008 financial collapse, the deeper scandal was that all the senior banking executives, who were responsible for gross frauds that pulverized the economy and put millions out of work and into foreclosure, escaped criminal prosecution. (Bernie Madoff did time for an old-fashioned Ponzi scheme that was unrelated to the systemic scams that crashed the system in 2008.) Instead, the government agreed to settlements that fined banks, without prosecutions of the executives responsible.
So if the Justice Department has opened the door to criminal prosecutions of individual bankers, that is a major and welcome change.
“Until bank executives are held personally accountable for their criminal actions, including the prospect of prison time, working people will continue to pay the price,” Sen. Elizabeth Warren (D-MA) told me. “We will better protect consumers in the future with Wells Fargo’s executives facing justice for one of the largest financial frauds in American history.”
The prosecution is very timely, given that several top executives at the large regional banks currently in the headlines used their privileged insider information to sell bank stock, well before their banks’ precarious condition became generally known. That is criminal behavior, and it cries out for criminal prosecution.
Specifically, Greg Becker, CEO of Silicon Valley Bank, sold $3.6 million worth of shares in the bank on February 27, 11 days before SVB was shut down by the FDIC as insolvent. And several top executives at First Republic Bank, another collapsed bank, sold almost $12 million worth of their stock in the two months before the crash.
But one jailed banker does not translate into a reversal of the long-standing lack of accountability for corporate crime. The Biden administration has an opportunity, amid the bank turmoil, to show a sustained commitment to executive prosecutions. So far, there’s scant evidence that they will do so.
THE NON-PROSECUTION OF THE INDIVIDUAL executives responsible for criminal behavior, in favor of the corporation being allowed to settle for fines (paid by shareholders), dates to the early 2000s. The full story of this policy shift is told in Pulitzer Prize winner Jesse Eisinger’s 2017 book, The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives.
Until 2003, prosecution of individual executives for criminal misconduct was the norm. In the savings and loan scandal of the 1980s, the Justice Department prosecuted more than a thousand executives as individuals. In 1990, junk bond king Michael Milken was sentenced to ten years, and served two. Likewise, in the dot-com bubble and bust, top executives of corporate giants, including WorldCom, Qwest, Adelphia, and Tyco, ended up doing prison time. All of these prosecutions and jail sentences happened under Republican presidents.
Until 2003, prosecution of individual executives for criminal misconduct was the norm.
But then prosecutions of top corporate executives effectively ceased, even after the collapse of 2008, which was built on corporate frauds. What happened?
The policy of non-prosecution was the paradoxical result of a series of reviews by the Bush White House and Department of Justice in the aftermath of the Enron meltdown. In that scandal, where fraudulent scams and fake accounting by Enron were enabled by its accounting firm, Arthur Andersen, the Department of Justice prosecuted individual executives at Enron, as well as the Andersen firm, eventually putting both companies out of business.
In the Enron/Andersen case, the system worked just the way it was supposed to. Justice created an Enron task force of prosecutors. They worked to bring airtight cases, flipped lower-level employees, brought cases before juries, and won convictions.
Several Enron senior executives, including CEO Jeff Skilling and CFO Andrew Fastow, did prison time. Founder and mastermind Ken Lay was found guilty and would have been sentenced to a long term had he not died of a heart attack before sentencing.
The prosecutorial treatment of Enron and Andersen set off a round of furious lobbying by corporations and the corporate defense bar, and soul-searching by the pro-corporate Bush administration. Andersen was a major accounting firm, and Enron had been the pride of Houston. Lay had been part of the Bush social circle. Had prosecutors gone too far?
In this climate, the deputy attorney general, a respected career prosecutor named Larry Thompson who had headed the task force on corporate crime, tried to please everybody. In a January 2003 memo, Thompson gave new life to the doctrine of “deferred prosecution agreements,” used to spare executives criminal liability. He wrote: “In some circumstances … granting a corporation immunity or amnesty or pretrial diversion may be considered in the course of the government’s investigation.”
That memo altered the pre-existing doctrine, which had been spelled out in a 1999 memo by then-Deputy Attorney General Eric Holder entitled “Bringing Criminal Charges Against Corporations,” which made clear that in cases of possible criminal misconduct, the Justice Department had only two choices: to prosecute or not to prosecute. The Thompson memo offered a third path—a deal for the corporation to pay a fine and promise remedial actions, with the Justice Department retaining the option of prosecution down the road (though this would be rarely used). In subsequent years, this grew into a widespread get-out-of-jail-free card.
Writing about deferred prosecution agreements in 2014, my colleague David Dayen found that they were invented more than a century ago to give juvenile defendants a chance to wipe the slate clean with supervised good behavior. In 1994, Mary Jo White, then the U.S. attorney for the Southern District of New York, repurposed DPAs to settle a case with a large corporate malefactor, Prudential Insurance, for a $330 million fine and no individual prosecutions. Holder’s memo shot down White’s innovation, but Thompson revived it.
White later became Obama’s SEC chair, where she was criticized for lenient conduct against corporations. She then returned to private practice as a criminal defense attorney. Her clients have included the Sacklers of Purdue Pharma, a relationship dating back to 2006.
According to Eisinger, before 2003, DPAs were used in only a handful of corporate cases. Then they became the norm. According to a Wall Street Journal review of 156 civil and criminal cases brought against the ten largest banks after 2009, in 81 percent the government neither identified nor charged any executives. In the remaining cases, just one was a senior executive, and he was charged civilly.
DOES THE PROSECUTION OF CARRIE TOLSTEDT signal the beginning of a reversal of this doctrine, and the Justice Department’s chickenshit coddling of corporate criminals? My reporting suggests that it’s still a one-off.
Tolstedt was former head of Wells Fargo’s consumer finance division and the senior executive in charge of the serial scams. In the plea bargain announced last Wednesday, she agreed to plead guilty to one count of interfering with a bank examination, though she could have been charged with a great deal more. A judge still has to accept the deal. If so, sentencing will follow.
The Wells case involved a series of deliberate deceptions that cost customers billions. Wells promoted a sales culture of “cross-selling.” Employees would often open accounts without customer consent. Wells employees opened as many as 3.5 million checking and savings accounts, and more than 500,000 credit cards, without customers’ authorization.
When regulators began asking questions, the low-level employees who carried out the fraudulent strategy took the fall. Some 5,300 employees were fired between 2011 and 2016. Not until Elizabeth Warren went after Wells CEO John Stumpf in 2016 did a top manager lose his job for designing and enforcing the sales strategy. Stumpf paid a personal fine of $17 million.
And here is where the plot thickens.
In February 2020, the Trump Justice Department settled all outstanding criminal issues with Wells for a $3 billion civil fine. The release announcing the settlement declared, “Wells Fargo Agrees to Pay $3 Billion to Resolve Criminal and Civil Investigations …” Technically, however, the deal included a deferred prosecution agreement that would be in effect for another three years.
As part of the settlement, five senior executives, including Tolstedt, paid civil fines.
It remains to be seen whether the Biden Justice Department will reverse the deferred prosecutions doctrine of corporate fines but no individual prosecutions.
After Trump left office, a more aggressive Consumer Financial Protection Bureau levied an additional $2 billion in restitution payments in December 2022, and a $1.7 billion fine against Wells, for other abuses not addressed in the 2020 Justice Department deal.
However, as far as the general public knew, the Wells case was settled and no criminal prosecutions of individual Wells former executives were in process. Then came last Wednesday’s announcement of the plea bargain with Carrie Tolstedt. I contacted the Justice Department to inquire whether any other individual prosecutions were live, and got no response.
One clue as to why Tolstedt was singled out for further prosecution is that she and her lawyers pushed back hard against some regulators rather than admitting wrongdoing in exchange for gentle treatment. In the SEC’s 2021 case against Tolstedt for misleading investors, she mounted an aggressive counterattack, with a paragraph-by-paragraph rebuttal to the SEC’s complaint, and demanded a jury trial.
This sort of thing tends to piss off prosecutors looking for a polite acknowledgment of wrongdoing and a civil settlement. The Justice Department may still be a pushover, but the SEC, now led by the public-minded Gary Gensler, is not a member of the chickenshit club. Apparently, Tolstedt’s lawyers, confronted with overwhelming evidence of their client’s guilt, changed the game plan and made the best bargain they could.
IT REMAINS TO BE SEEN whether the Biden Justice Department will reverse the deferred prosecutions doctrine of corporate fines but no individual prosecutions that began under Bush II and persisted under Obama and Trump. The initial signs are not good.
I checked the record for any sign that the Biden Justice Department has revised the disgraceful guidelines that allow coddling of corporate criminals. I found none.
On the contrary, the Justice Department has put out several updated guidelines to its criminal justice enforcement policies, and all are in the same spirit of coaching corporations on how to avoid prosecution. The first of this series, a 2015 memo by Obama deputy attorney general Sally Yates, had a promising title: “Individual Accountability for Corporate Wrongdoing.” The memo contained some fine rhetoric on the importance of deterrence and public confidence. But it did not change DOJ practices in terms of opting for settlements over prosecutions.
The most recent guidance by current deputy attorney general Lisa Monaco, released last September, emphasized the benefits of cooperating with the government in investigations of wrongdoing.
All of these memos emphasize the benefits of corporations cooperating with the government to improve their behavior. None of them discard the discredited doctrine of deferred prosecution. In theory, they are supposed to prioritize individual executive prosecutions over that of the corporation. In practice, they’ve done next to nothing to make those prosecutions a reality.
Memos by several blue-chip law firms to clients treat these documents as helpful hints by the Justice Department on how corporations that break the law can cooperate and avoid criminal liability.
In short, more chickenshit.
Monaco is a career prosecutor. Early on, she was part of the Enron task force. But she has absorbed the culture of settlements and deferred prosecutions. She served as chief of staff to FBI director Robert Mueller and later as counterterrorism adviser to President Obama.
The prosecution of Sam Bankman-Fried and kindred crypto crooks, as well as Tolstedt’s prosecution, points the way toward accountability. But given the flagrant lawbreaking of several recently failed banks, the Justice Department can do one simple thing to put the policies of settlements and deferred prosecutions in the past.
We have not been particular fans of the current, ultra-cautious attorney general, Merrick Garland. The AG could end this coddling by issuing a memo superseding the 2003 Thompson memo and the recent rhetorical feints, so that prosecutions of corporate executives for criminal wrongdoing would become standard practice, rather than one-offs.
